We have reviewed 4QFY10 results of IFCI. Acceleration in recovery rate has brought the institution back on track. Fresh sanctions and disbursement has started growing at a very high pace. We retain ‘BUY’ on IFCI and upgrade our one year target price to Rs 76/- per share. • Results broadly in line with expectations; PAT up 2% YoY for FY10 driven by higher operating profits which have grown by 12% NIMs flat at 1.8% for FY10 against similar margins last year, however it has significantly improved from 0.5% in FY08. Retain ‘BUY’ with revised TP to Rs 76

IFCI has since last three years turned into positive profits and networth. Fresh sanctions and disbursals are in full swing. Total approvals increased in FY10 to Rs 70bn as against Rs 40bn previous year. Similarly, total disbursements improved to Rs 60bn as against Rs 33bn last year. IFCI has a very comfortable capital adequacy ratio of 17.9%. It can easily grow at an accelerated rate without raising fresh capital. It continues on plan to rope in a strategic partner which will not only bring in capital to strengthen the balance sheet, but also bring in the required expertise to expand its reach in the financial services gamut. Valuations
Descriptions Total Assets excluding deferred tax asset as on FY10 Gain/(Loss) accrued on quoted Investments NSE profit accrued (5.44% stake) Recovery of NPA (assuming 40% recovery rate) INR Mn 167,850 5,564 5,770 15,016 194,200 135,620 2,640 55,940 1.0 55,940 738 76.0

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Khandwala Securities Limited

Sanctions/Disbursals Soaring

Fresh sanctions and disbursals are in full swing. Total approvals increased by 75% in FY10 to Rs 70bn as against Rs 40bn previous year. Similarly, total disbursements improved by 83% in FY10 to Rs 60bn as against Rs 33bn last year. Income from core business will have to accelerate to support bottom-line, as proceeds from recovery of bad loans will decrease along with decrease of Gross NPA base.
80 (INR Bn) Sanctions Disbursals

60

40

20

0 FY07 FY08 FY09 FY10

Stable Margins

NIMs are flat at 1.8% for FY10 against similar margins in FY09; however it has significantly improved from 0.5% in FY08. Management expects NIMs to improve to 2.6% in FY11 and 2.8% in FY12.
2 (%)

1

0

-1

-2 FY07 FY08 FY09 FY10

Recovery process to accelerate

With a rebound in economic activity, we expect NPA recoveries to accelerate. We have factored 40% recovery from NPA. Gross NPAs have scaled down 26% to Rs38bn in FY10, on the back of accelerated recovery of NPA. Net NPAs as of March 10 were Rs0.5bn. Provision coverage ratio of 98% exceeds the regulatory stipulation of 70% by a healthy margin and eliminates future risk of provisioning and impact on profitability.

IFCI Limited May 27, 2010

2

Khandwala Securities Limited

Gross NPA 100 (INR Bn)

Net NPA

Provision Coverage Ratio (RHS) (%) 105

75

100

50

95

25

90

0 FY06 FY07 FY08 FY09 FY10

85

Well Capitalized

IFCI has a very comfortable capital adequacy ratio of 17.9%. It can easily grow at an accelerated rate without raising fresh capital. It also complies the required capital adequacy of 15% by March 2011, as proposed by RBI. Judicious use of capital will provide adequate cushion for further leverage.
22 (%)

11

0

-11

-22 FY07 FY08 FY09 FY10

Banking license would provide further upside

In a bid to make our financial system more sound, regulator might decide to issue banking license to NBFC. Once it happens, IFCI would be in all scenario most probable beneficiary. Once converted in to a bank, cost of funds would significantly come down and would cater to capital need to expand its loan book. In addition to normal lending activity, it has started focusing on private equity participation, project development and other advisory service. It plans to offer products, which banks are restricted like promoter’s funding, take-out finance and debt swapping. It had invested Rs 382 cr in its various subsidiaries including IFCI Financial services Ltd, IFCI Venture Capital Funds, IFCI Infrastructure development Ltd and IFCI Factors Ltd.

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